Comments on: How would a behavioral economist look at the sub-prime mortgage crisis?

By: Besplatno man

Besplatno man — Thu, 14 Jan 2010 18:03:00 +0000

Very excellent photo was got.

By: Albert Yang

Albert Yang — Mon, 12 Jan 2009 17:13:30 +0000

I think we all need to keep in mind that depending on where one lies on the socioeconomic/credit-worthiness ladder, rational for one person may not equate to rational for another.

In the case of sub-prime borrowers, maybe they were exhibiting “rational” behavior. In normal times, they would never be considered for a $250,000 no-money-down interest-only loan. And aware of their past poor credit history and hopelessly resigned that they will only continue such bad behavior in the future, they might rightfully conclude that if they don’t accept the generous loan now, they might not get it in the future. Even if it means they can’t afford it and will foreclose within 12 months or so….at least for 12 months they can live a lifestyle that they will “never” be able to afford (assuming they plan on continuing their behavior of uncreditworthiness).

By: Mark

Mark — Tue, 16 Dec 2008 16:26:38 +0000

I put this one on both parties. The consumer is ignorant to borrow the max amount and not take into account his own financial risk at being mortgaged to the hilt.
The mortgage broker is also at fault for not forcing the ignorant consumer to see the TOTAL cost of his loan through the life of the mortgage. He should also show worst case scenarios to his client to ensure he is prepared for bad times.
The mortgage broker is in the business of selling mortgages. So, I would place more blame on the consumer for not examining worst case scenarios and purchasing larger mortgages than they could afford under those scenarios.

By: Mortgage

Mortgage — Wed, 22 Oct 2008 16:47:08 +0000

Thanks for your insights. It’s confusing to think about mortgages these days, so it’s good to have opinions from professionals.

By: Nigel

Nigel — Thu, 16 Oct 2008 03:49:31 +0000

Over the last few in Australia I have noticed a trend in home ownership. People are buying much larger houses. Much larger than they need either at the time or probably ever. 30 squares, 3 bathrooms, 5 bedrooms, lounge,dining, family and rumpus room. And of course they cost more, a lot more. The level of housing debt used to be about 3 to 4 times a persons wage but is now more like 7 times going by the latest figures.
Unlike PJ I am quite sure this is not overt greed. It is simply people aiming to match what is being depicted in the media, newspapers and magazines as normal. Most families now have two bread winners and so this level of debt seems to be manageable , especially before kids come along and while interest rates are low. And when talking to bankers, as I did when buying my first and only house 18 years ago, the emphasis was on ‘maximum loan’. Even 4 times my income seemed too large. Anything higher the Gen Y’ers have got into must be truly scary however poor financial planning and the lack of a historical context does not make for greed.
I think there is a lot more human incompetence than greed.

By: jonathan smith

jonathan smith — Tue, 14 Oct 2008 19:42:51 +0000

Borrowers’ and bankers’ pendulums are swinging now in the “opposite” direction; as of Sep 30, total consumer debt was falling at an annual rate of 3.7%. This is the first time the pendulum swung in the opposite direction. Will it go to far this way? Can it go too far this way?

By: PJ

PJ — Tue, 14 Oct 2008 15:38:38 +0000

I am sorry sir… but how can we call the behavior of home-owners as irrationality? It may be irrational to a rational person, but there is a perfectly good word called “Greed”. People were Greedy to buy houses that they could not afford.